Friday, July 16, 2021

Let's ban non-compete agreements

Matt Yglesias writes about it:

The non-compete issue is interesting to me both because it’s important in its own right, especially for lower-wage workers, but also because it implicates a big picture theoretical issue that I don’t think gets discussed enough. The question here is roughly something like “is innovation difficult, or is innovation expensive?” If innovation is expensive then you’ll support all kinds of policies that enrich the owners of the most innovative enterprises, because maximizing the financial returns of innovation is critical to maximizing the quantity of innovation-facilitating financial inputs.

But suppose instead that innovation is difficult. Lukas Walton has a net worth of $22 billion because his grandfather founded Walmart. If he decided he really only needs $5 billion in life and is going to plow the other $17 billion into a massive R&D effort, how much innovation will he really generate? I think likely not that much, because (no offense) he’s just some guy who happens to be rich, not a visionary inventor or a brilliant investor. I don’t think you can just turn on the spigot and innovate. And if the primary impediment to innovation is that it’s objectively difficult, then you’ll be interested not in maximizing the financial rewards but in maximizing the diffusion of ideas.

Innovation IS difficult and non-competes DO impede the flow of ideas. California law forbids non-competes, and Silicon Valley does find without them. Why? Because the free and easy movement of employees from one company to another makes for the easy flow of ideas. Without that, innovation is difficult.


It could be the case that California is essentially doing a beggar-thy-neighbor policy. By implementing pro-poaching regulations, they themselves poached the startup economy from the rest of the country. But the poaching itself is bad because it reduces the financial returns to innovation by making it hard to safeguard trade secrets.

That just seems wrong to me. Was Steve Jobs sitting on stealth innovations that he could have unleashed if only the personal financial returns to him were a little larger?

I doubt it. In fact, Jobs got surprisingly little financial upside from the iPhone compared to the founders of other giant tech companies since he sold his shares during his absence from the company. His widow Laurene Jobs Powell’s fortune is mostly Disney stock obtained from the sale of Pixar rather than Apple stock. And Apple itself generated its most successful innovation at a time when its financial resources were meager compared to what it has available today. The new, richer company isn’t rolling out innovations at two times the pace of Jobs-era Apple because that’s just really hard. You can’t will innovations into existence with resources and incentives; you need ideas and vision, and they are just objectively in short supply.

In other words, while letting companies better defend their business methods might let them capture a larger share of the upside of innovation, it seems unlikely to me that it would meaningfully increase the amount of innovation.

There's more at the link.

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